The latest economic forecast from the Bank of Estonia, the country’s central bank, expects the economy to grow by 0.6% this year, and by over 3% in the next two years; the acceleration in growth in 2026 will be substantially driven by the additional borrowed money directed by the government into the economy.
“The conditions for growth within the economy itself will improve steadily until 2027, when the financial stimulus from the government will end. Foreign markets will by then be in a better state than they are now, and Estonian companies will have managed to become more competitive,” the central bank says in its forecast.
“Rises in production costs and taxes will keep inflation in Estonia high this year at 5.3%. It will come down next year to about 2% and then stay around there in 2027.”
According to the the Bank of Estonia, the country’s economy has been recovering since last year, although this is not yet evident in the statistics for economic growth.
“Growth in exports, manufacturing and retail sales, and increased activity in the lending market indicate that several sectors have been performing better since the middle of last year. The trade agreements signed in the summer have reduced the uncertainty caused by the US tariffs, and this has had a positive effect on the Estonian economy. Growth has been supported further by interest rates coming down and by prices falling for oil and other commodities.”
Not wise to use the maximum deficit allowed
The central bank says the economy is expected to grow by 0.6% this year, which is less than the 1.5% forecast in June.
“The economy will be given a powerful boost in 2026 by money borrowed by the government and directed into the economy,” the Bank of Estonia says, adding that its forecast for the coming year is based on tax changes that have been passed and spending plans that have been approved, the most important of which are the rise in defence spending to 5% of GDP, the equal application of the tax-free income ceiling, and the lifting of the obligation to pay income tax from the first euro.
The bank warns that it is not reasonable to use the maximum state budget deficit allowed by the exemption clause to its full extent.
“Given that the economy is recovering and that there is a permanent wide deficit in the state budget, it would be wise to limit any further deterioration in the fiscal position to only the amount needed for extra spending on defence. If spending on defence remains high for a long time though, then cover for it would need to be found from the current revenues of the state.”
Wages to grow by over eight per cent
“The purchasing power of people will increase substantially. The average net wage will rise by more than 8% next year, and changes in the price level will mean that the purchasing power of wages increases by 5%. If the currently legislated rise in income tax is cancelled, the purchasing power of the average wage will rise by even more next year, as it will gain around 6.5%,” the Bank of Estonia says.
“The sharp rise in incomes will substantially increase people’s capacity to consume, promoting domestic demand and lifting the economy. Employment will start to increase and unemployment to fall a little faster than previously forecast in consequence.”
The central bank also predicts that the inflation will come down from its high level of this year to close to 2% by the second half of next year.
“The impact of the motor vehicle tax will disappear from the inflation statistics at the start of 2026, and it will be followed in the middle of the year by the effect of the rise in VAT and higher prices for administratively regulated medical services. Further increases in prices will be restrained as growth in wages slows, imported goods and services become cheaper as the euro appreciates, market expectations for the oil price fall, and prices for food commodities rise only moderately or even in some cases fall.”
